Toys ‘R’ Us plan favours firm’s overseas suppliers

Toys “R” Us Canada wants to continue to pay its foreign suppliers, while leaving its North American suppliers to collect whatever money is left at the end of the insolvency process, according to documents filed in Ontario Superior Court.

The move would ensure the Canadian subsidiary of the global toy retailer — which applied for creditor protection in the U.S. on Monday and in Canada a day later — has an uninterrupted supply of merchandise as it heads into the busy holiday shopping season.

In North America, when a company seeks creditor protection, suppliers are required to continue supplying goods without collecting on owed balances.

Suppliers that don’t can be held in contempt of court and possibly jailed, but that provision is difficult or, in some cases, impossible to enforce abroad, according to Lou Brzezinski, a partner in Blaney McMurtry’s commercial litigation group.

“It’s not fair to Canadian suppliers,” said Brzezinski, who represented suppliers in the Target Canada insolvency and in the current Sears Canada insolvency.

“Foreign suppliers are, in fact, given an advantage because they don’t abide by the law, whereas Canadian companies that abide by the law are not being paid,” said Brzezinski, adding that the ruling affects U.S. suppliers as well, under North American treaty agreements.

Brzezinski said that while it’s unusual to have a company declare it’s going to pay its overseas vendors and not local ones, in practice it’s known to happen.

According to the court documents filed in Toronto in support of the insolvency under the Companies’ Creditors Arrangement Act (CCAA) on Tuesday, business at Toys “R” Us stores in Canada was good, but got bogged down by credit issues facing its corporate parent in the U.S.

Operating legally under the name Toys Canada, Toys “R” Us has 82 stores in 10 Canadian provinces — 35 in Ontario — and employs 4,000 people.

Toys “R” Us operates a store on Fairway Road in Kitchener.

Globally, Toys “R” Us operates or licenses more than 1,950 stores in 38 countries and jurisdictions, employing 60,000 fulland part-time employees.

The bankruptcy filing in the U.S. estimated the company has more than US$5 billion in debt, which it pays around $400 million a year to service, according to Bloomberg. The company has struggled with debt since private-equity firms Bain Capital, KKR & Co. and Vornado Realty Trust took it private in a $6.6-billion leveraged buyout in 2005.

The company, in the middle of building inventory for the holiday season, which generates about 40 per cent of its yearly revenue, would have run out of money within two weeks, according to its financial adviser.

Toys Canada has more than 700 suppliers, but products supplied by its top 10 suppliers account for a significant percentage of all merchandise purchased by the Canadian business, according to TeedMurch.